Great Lakes Dredge & Dock Upgraded by Moody's, Shares Up - Analyst Blog


Shares of Great Lakes Dredge & Dock Corporation ( GLDD ) gained as much as 2.6% and eventually closed at $7.48 on Aug 22, after Moody's Investors Service - the rating unit of Moody's Corporation ( MCO ) - upgraded its outlook to positive from stable.

The upgrade mainly reflects Great Lakes Dredge & Dock's continued improvement in operating performance and financial leverage. A consistent focus on core dredging and environmental remediation businesses after the sale of its demolition business led to strong operating growth.

In Apr 2014, Great Lakes Dredge & Dock completed sale of the demolition business that was previously part of the environmental & remediation segment, for $5.3 million. The demolition business, which contributed 10-15% of revenues in fourth-quarter 2013, recorded loss due to internal control weaknesses and reporting issues. The sale will likely expand services of the company's environmental & remediation segment.

The rating also reflects expectations of a moderate improvement in earnings before interest, taxes, depreciation and amortization (EBITDA) margins, given the strong backlog and bidding activity in the pipeline.

Financial leverage pro forma for sale of the demolition business has improved to 4.0x debt/EBITDA (on a Moody's adjusted basis) for the last twelve-month period ended Jun 30, 2014 from nearly 6.0x a year ago.

However, Moody's affirmed Great Lakes Dredge & Dock's Corporate Family Rating (CFR) and Probability of Default Ratings (PDR) at B3 and B3-PD, respectively. The rating affirmation depicts the highly cyclical and high fixed-cost nature of the dredging industry, high customer concentration and dependence on government funding priorities.

The ratings remained at B3 despite improved credit metrics. This was owing to risks associated with the company's intention to increase debt levels to finance the construction of its new $140 million Articulated Tug/Barge (ATB) hopper dredge, which will expectedly become operational in the second half of 2016.

Additionally, earnings fluctuations from quarter to quarter due to impact of adverse weather conditions on equipment utilization, changing funding availability and variation in quarterly backlog levels were taken into account while assigning the ratings.

Rating on the company's unsecured notes due 2019 were reiterated at Caa1. The rating agency also verified speculative grade liquidity rating (SGL) at SGL-3, reflecting an adequate liquidity profile.

However, Moody's remained concerned about free cash flow, which is expected to be negative due to higher level of capital expenditures required for constructing the new ATB hopper dredge. Additionally, working capital swings related to the seasonal nature of the business and overseas operations contribute to variability in free cash flow generation.

The ratings anticipate continued usage of the company's $175-million revolving credit facility to fund working capital swings and for partially funding construction of the ATB dredge.

Moody's also stated that the ratings could be raised if the company improves its liquidity position, maintains a healthy backlog and debt to EBITDA is sustained below 4.5x, inclusive of ATB dredge-related financing. However, if debt to EBITDA exceeds 6x, it could pressure ratings.

Great Lakes Dredge & Dock expects strong fleet utilization in the second half of the year. The company expects most of the environmental & remediation segment's backlog to be complete in 2014. Moreover, it remains optimistic about increase in bidding activity, which will add to backlog.

Further, the Water Resources Reform and Development Act is a catalyst for the domestic dredging industry, which will drive the company's long-term growth.

However, the company remains concerned about unfavorable weather and fluctuations in currency exchange rate that could affect revenues in the future.

Great Lakes Dredge & Dock Corporation is the largest provider of dredging services and one of the major providers of commercial and industrial demolition and remediation services in the U.S., mainly in the Northeast. The company owns and operates the largest and most diverse fleet in the U.S. industry, comprising over 200 specialized vessels.

At present, Great Lakes Dredge & Dock holds a Zacks Rank #4 (Sell). However, some better-ranked stocks in the sector include Boise Cascade Company ( BCC ) and UCP, Inc. ( UCP ), both of which have a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: CFR , SGL , MCO , BCC , GLDD

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